Brazil floods to increase demand for catastrophic risk coverage: S&P

As per a new report from S&P Global Ratings, the recent floods in Rio Grande do Sul, Brazil, may increase demand for catastrophic risk coverage, likely pushing up prices and premiums for this coverage type.

Heavy rains started in Rio Grande do Sul, Brazil’s fifth-largest economic state, on April 28, and amounted to 400 millimetres in just the first five days of May, according to the Instituto Nacional de Meteorologia.

The ensuing floods reportedly caused major dislocations in the state, which is an industrial and agricultural centre, taking the lives of around 147 people and displacing hundreds of thousands more.

As of May 9, losses due to the floods were estimated at BRL 7.5 billion. Of this figure, the Confedereção Nacional de Municipios observed BRL 2 billion in public sector losses and BRL 1.1 billion in private sector losses, with the bulk of the losses -BRL 4.4 billion- in personal property damages.

Now looking at the flooding’s impact on the re/insurance sector, S&P said it considers the most exposed segments to be loss of profit insurance and property and residential insurance.

However, the rating agency stated there are a range of factors mitigating the repercussions for local insurers, including the fact that Brazilian SMEs don’t typically insure for catastrophic risk.

Also, flood coverage is optional for car insurance, which S&P believes it’s relatively low, while local insurers don’t typically cover major risks such as airports and stadiums and agricultural insurance coverage for rice and corn is generally very low.

At the same time, S&P observed that the floods could increase demand for catastrophic risk coverage, likely pushing up prices and premiums for this coverage type.

The firm concluded, “Although it’s too early to assess the full impact of recent extreme flooding on the state of Rio Grande do Sul’s economy, S&P believes the damage will be material and could hurt the asset quality of Brazilian banks, but expects contained losses for local insurers.

“We think there could be significant fallout for the state’s agricultural sector, services industry, private property, and public infrastructure. We also anticipate risks for SME loans, consumer loans, and credit cards.”

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